After selective asset divestment, TSH has minimal net gearing today. As such, the group has started work to expand its oil palm area by another 20%-25% within the next 2-3 years. The group is also studying carbon market opportunities following its secondary listing in SGX Mainboard. We maintain our forecasts, TP of RM1.30 and OUTPERFORM call.

NE Kalimantan land sale, a significant pivot. Saddled with RM637m in net debt in April 2022, TSH agreed to sell 13,898 Ha of mostly unplanted agriculture land for RM731m cash. 7,817 Ha of the land was sold in Aug 2022 followed by another 575 Ha in Jan 2023. All in all, TSH has received RM457m in cash. Coupled with operating cash flows, net debt has been pared to just RM88m as of Sept 2023. Disposal of the remaining 5,506 Ha for RM274m cash should conclude by mid-2024. Altogether, the divestment has already enabled TSH to substantially degear and the group can now consider expansion once again.

Long-term bullish on palm oil. Unlike the past few decades, moving ahead, TSH expects more modest growth from palm oil supply even as edible oil demand is likely to continue growing. As such, the group will not rule out further expansion, organically or via acquisitions. However, the top priority for the next two to three years is to grow organically, planting up another 8k-10k Ha of oil palm land which the group already owns.

Expanding oil palm planting by 20%-25% over the coming 2-3 years. After the NE Kalimantan land sales, TSH should still have 60k Ha of land left with only 40k Ha planted up with oil palm. More importantly, the divesture has allowed TSH to re-capitalise and it is now planning to develop new oil palm area. A new nursery and planting team are now in place and the group is aiming to plant 8k-10k Ha of new area over the next 2-3 years. Estimated capex of RM200-300m will be funded by a mix of sale proceed, operating cash flows as well as borrowings.

SGX Mainboard listing. In Sept 2023, SGX welcomed the secondary listing of TSH to its Mainboard. TSH’s primary listing remains on Bursa but sees wider opportunities with a SGX presence. Firstly, the bulk of TSH’s earnings are already from Indonesia; hence, an SGX listing could provide greater flexibility in terms of: (i) funding, (ii) regional growth, for example many Indonesian corporations are comfortable with Singaporean listing, and (iii) wider carbon-related opportunities in term of market or trading including renewable energy and sustainable forestry where TSH manages over 100,000 Ha in Sabah.

Forecasts. Maintained. CPO is expected to trade between RM3,500 to RM4,000 per MT but lower for TSH (at RM3,000-3,500 per MT) as most of its CPO is sold at Indonesian prices. However, FY24-25F margins are likely to improve compare to FY23 on lower input costs such as fertiliser and fuel. The weakness in palm kernel (PK) prices should also see modest recovery FY24 as buyers need to restock even though the underlying market is likely to stay soft.

Maintain OUTPERFORM, FY23-24F CEPS and TP of RM1.30 based on average P/NTA of 0.8x for smaller to mid-sized plantation players. There is no adjustment to our TP based on ESG given a 3-star rating as appraised by us (see Page 3).

Risks to our call include: (i) Western hostility towards palm oil on sustainability and bio-diversity issues, (ii) impact of weather and labour shortages on production, (iii) weak CPO and palm kernel prices, and (iv) cost inflation particularly fertilizers.

Source: Kenanga Research - 29 Jan 2024